ATO releases decision impact statement on anti-avoidance decision

The Tax Office has released its decision impact statement on the Mylan Australia Holding Pty Ltd v Commissioner of Taxation decision, which was handed down by the Federal Court of Australia in March last year.

In its decision, the Federal Court determined that Part IVA did not apply to a scheme where the head of a tax consolidated group had partly financed the purchase of shares in an unrelated pharmaceutical company through the use of an intergroup loan.

The Federal Court ruled in favour of the taxpayer, rejecting the Commissioner of Taxation’s claim that the taxpayer’s acquisition activities had triggered anti-avoidance rules.

The court said a taxpayer’s decision to employ a certain scheme partly to obtain a tax benefit will not necessarily trigger the anti-avoidance rules.

The case concerned US-based company Mylan Inc, which in 2007 acquired five subsidiary companies of Merck Generics Group, a Dutch science and technology group. Alphapharm, an Australian generics business, was among those acquired.

The acquisition of Merck Generics was pursuant to a share purchase agreement (SPA), which was executed on 12 May 2007. The SPA allowed for Mylan to substitute one of its affiliates to directly acquire the interests in any of Merck's subsidiaries.

Mylan then entered into a senior credit agreement (SCA) with a syndicate of lenders to fund the acquisition. At around the same time, the SPA was amended. These amendments enabled the sale of Merck Generics' subsidiaries in Australia, Canada and France in exchange for promissory notes from members of the Mylan Group before Mylan's global acquisition of Merck Generics.

The separate sales of the Australian, Canadian and French subsidiaries did not alter the purchase price for the global acquisition.

As part of that acquisition, MAHPL and its subsidiary, Mylan Australia Pty Ltd (MAPL), were incorporated, with MAHPL as the head of an Australian tax consolidated group. MAPL purchased the Australian arm of Merck Generics, Alphapharm Pty Ltd (Alphapharm), through a mixture of intragroup interest-bearing debt and equity at a ratio of three to one.

The debt instrument used to fund the purchase of Alphapharm was a promissory note (PN A2) issued by MAPL to a Luxembourg company in the Mylan Group ultimately held by Mylan Bermuda Limited for a principal amount equivalent to €502.5 million (approximately $785 million), with the principal amount to be adjusted to 75 per cent of the value of Alphapharm retroactively applied to the date of the instrument, being 2 October 2007.

PN A2 also contemplated that the interest rate attaching to the debt would be determined within 90 days of 2 October 2007. PN A2 was formally amended on 8 January 2010, with the principal increased to $923,205,336 and the interest rate fixed at 10.15 per cent with retrospective effect from 2 October 2007.

The tax consequences of the debt arrangements put in place to fund the acquisition by MAPL of Alphapharm were that it entitled MAHPL to interest deductions for the interest paid on PN A2 with withholding tax of 10 per cent to be paid on the interest payments, rather than the corporate tax rate of 30 per cent.

The ATO said the Commissioner had identified a wider scheme relating to the taxpayer’s decision to incorporate the Australian holding companies, to amend the acquisition agreement to have the Australian subsidiary carry out the acquisition, and to issue the Luxembourg loan.

Had the acquisition, instead, been entirely funded by a Mylan group company with no debt pushdown into Australia, the taxpayer would not have obtained the same tax benefit, it claimed, the Tax Office said.

The Commissioner also identified a narrower scheme relating to the decision to issue the Luxembourg loan at a relatively high fixed interest rate and principal, thereby maximising deductions.

While the court agreed it “appeared” the taxpayer had obtained a tax benefit by application of the schemes, it did not agree this was the dominant purpose of entering into them.

Funding the acquisition with 100 per cent equity would have made less commercial sense than going beyond the simple tax benefit.

In reaching this conclusion, the court agreed that inter-company debt was believed to be more flexible than equity and, therefore, made good commercial sense.

In its decision impact statement, the ATO noted that the scheme predated the introduction of section 177CB and that the matter was, therefore, determined under the old Part IVA.

"Mylan was thus decided against the background of the case law that determined that identification of an alternative postulate of what would have happened, but for a scheme invites a focus into what is the most probable counterfactual, rather than simply what is a reasonable counterfactual," the Tax Office said.

"Further, paragraph 177CB(4)(b) now requires the Court to disregard the Australian tax implications of a counterfactual when determining a reasonable counterfactual. Whether the same result would have followed had Mylan fallen for consideration under the new Part IVA is an open question."

The ATO said the decision "does not disturb [its] view that, depending on the relevant facts and circumstances, Part IVA may apply to 'debt push-down' schemes".

"While the Court found that Part IVA did not apply, that conclusion was reached against the background of important findings of fact on a variety of issues," it said.

The ATO also said the court had confirmed that whether or not it pursues a transfer pricing case in a particular matter, the ATO is not precluded, where appropriate, from making submissions about an interest rate being excessive as part of a case under Part IVA.

"This is because the excessiveness of an interest rate can be a factor that falls into the consideration when assessing purpose under section 177D," the Tax Office said.

The Tax Office said that for future matters, it will consider on a case-by-case basis whether to pursue either, or both, a transfer pricing case and Part IVA case in challenging a debt push-down scheme.

"The considerations relevant to the application of the transfer pricing provisions in Subdivision 815-B of the Income Tax Assessment Act 1997 are economically-based and invite different considerations to the analysis demanded by Part IVA," it said.

The ATO also stated that it would be reviewing the impact of this decision on related advice or guidance, including Law Administration Practice Statement PS LA 2005/24 Application of General Anti-Avoidance Rules, which provides guidance to tax officers who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement.